OECD-Fostering Public-private Partnership for Innovation in Russia - Copy

8/18/2019 OECD-Fostering Public-private Partnership for Innovation in Russia - Copy

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ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT

Fostering Public-PrivatePartnership

for Innovation in Russia


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ORGANISATION FOR ECONOMIC CO-OPERATION

AND DEVELOPMENT

The OECD is a unique forum where the governments of 30 democracies worktogether to address the economic, social and environmental challenges of globalisation.

The OECD is also at the forefront of efforts to understand and to help governments

respond to new developments and concerns, such as corporate governance, the

information economy and the challenges of an ageing population. The Organisation

provides a setting where governments can compare policy experiences, seek answers to

common problems, identify good practice and work to co-ordinate domestic and

international policies.

The OECD member countries are: Australia, Austria, Belgium, Canada, the

Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,Ireland, Italy, Japan, Korea, Luxembourg, Mexico, the Netherlands, New Zealand,

Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey,

the United Kingdom and the United States. The Commission of the European

Communities takes part in the work of the OECD.

OECD Publishing disseminates widely the results of the Organisation’s statistics

gathering and research on economic, social and environmental issues, as well as the

conventions, guidelines and standards agreed by its members.

© OECD 2005

No reproduction, copy, transmission or translation of this publication may be made without written permission.

Applications should be sent to OECD Publishing: [email protected] or by fax (33 1) 45 24 13 91. Permission to photocopy a

portion of this work should be addressed to the Centre français d'exploitation du droit de copie, 20, rue des

Grands-Augustins, 75006 Paris, France ([email protected]).

This work is published on the responsibility of the Secretary-General of

the OECD. The opinions expressed and arguments employed herein do not

necessarily reflect the official views of the Organisation or of the governments

of its member countries.


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FOSTERING PUBLIC-PRIVATE PARTNERSHIP FOR INNOVATION IN RUSSIA – 922005041P1/ISBN 92-64-00965-5 – ©OECD 2005

TABLE OF CONTENTS

Introduction 5

Main Findings and Policy Recommendations 7

Chapter 1. From Steady to Sustainable Growth:

The “Diversification through Innovation” Imperative

23

Chapter 2. The Russian Innovation System:Main Features, Strengths and Weaknesses

29

Chapter 3. Russian Innovation Policy:

Achievements and Shortcomings

53

Annex 1. Complementary Statistics and Information 75

Annex 2. List of “Megaprojects” 89

Annex 3. International Conference on Public-Private Partnershipsfor Innovation: Programme

93

Appendix 97


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INTRODUCTION - 5


INTRODUCTION

This report presents the results of an OECD-Russia co-operation project

carried out under the aegis of the OECD Committee for Scientific and Techno-

logical Policy. This project was initiated upon a request from Andrey Fursenko,

Minister of Education and Science of the Russian Federation, and implemented

under the responsibility of an organising committee co-chaired by Boris Simonov,

Director-General, Federal Service for Intellectual Property, Patents and Trade-

marks of the Russian Federation, and Daniel Malkin, Head of the Science and

Technology Policy Division of the OECD Directorate for Science, Technology

and Industry (DSTI).

The report examines how relations between the science base and industry,

and more specifically partnerships between the public and private sectors, can be

developed in Russia to:

• Foster innovation throughout the economy in order to strengthen the basis for

sustainable long-term growth.

• Improve the international competitiveness of Russian firms.

• Enable the Russian Federation to better respond to domestic demand for high-

technology and sophisticated engineering products and systems.

The report draws on the experience of both OECD countries and the Russian

Federation in fostering industry/science linkages. It also reflects work done in the

OECD on public-private partnerships, national innovation systems and govern-

ment policies to promote innovation. It builds on previous co-operation betweenthe OECD and the Russian Federation,

1 and the results of a series of interviews

with major Russian stakeholders by a group of OECD officials and experts2 as

well as of a special survey of current Russian initiatives in the area of public-

private partnerships.3

It was presented and discussed at a conference held in

Moscow in December 2004.4

This report was drafted by Jean Guinet of the Science and Technology

Policy Division (DSTI, OECD). It has benefited from contributions by John

Barber, Juergen Marchat and Hernesniemi Hannu, thanks to a grant by the British

Council and support from the governments of Austria and Finland. Natalia

Zolotykh (Director, Transtechnology, Russia) and Gang Zhang (Science andTechnology Policy Division, DSTI, OECD) provided substantive and organi-

sational support throughout the project.

1. See Bridging the Innovation Gap in Russia, OECD Proceedings of the Helsinki

Seminar, 2001.

2. The list of persons interviewed can be found in the Appendix.

3. Public-Private Partnerships for Innovation (Survey of Current Initiatives), by Natalia

Zolotykh et al. The report draws also on information gathered by Irina Dezhina ,

Institute for the Economy in Transition, Moscow.

4. The conference programme as well as the list of sponsors can be found in Annex 3.


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6 - INTRODUCTION


Synopsis of main policy recommendations*

General

Improve framework conditions for innovationo Strengthen the mechanisms for inter-ministerial co-ordination on

innovation issues

o Remove specific regulatory impediments to innovation

o Remove uncertainties regarding ownership of tangible and intangible

assets (e.g. intellectual property rights)

o Define a pro-innovation procurement policy

Increase the contribution of science and technology policy to innovation

o Accelerate the restructuring of the public research sector

o

Re-inforce university research

o Scale up programmes to promote small innovative firms

o Re-focus PROs on fundamental research through changes in financing

mechanisms

o Secure financing for the maintenance, revamping and development of

research infrastructures

More specific

Foster industry-science relationships through public-private partnerships

(P/PPs)o Consolidate and expand existing initiatives

Prepare new rounds of “Megaprojects”, subject to rigorous

evaluation of the first round

Consider replicating the programme on “Biotechnology for

Medicine and Agriculture” in similar (multidisciplinary)

technological fields

Prepare expansion of the Technology Transfer Centres programme

o Launch new initiatives

Pilot P/PP programme(s) of long-term collaborative research

Determine long-term needs for public procurement of technologies

and high-technology products that could be fulfilled through P/PPs

Help firms develop their R&D and technological competences

Build nation-wide networks of actors

Support small (public-private) research teams

o Mobilise additional sources of funding for public support to P/PPs

_______________________

* This outlines the main policy recommendations which are put forward in more detail in the report.


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MAIN FINDINGS AND POLICY RECOMMENDATIONS - 7


MAIN FINDINGS AND POLICY RECOMMENDATIONS

From steady to sustainable growth: the innovation imperative

Over the past six years Russia has enjoyed steady economic growth.However, the sustainability of the current growth pattern raises serious

concerns. On the supply side, engines of growth are over-concentrated in a

handful of industries whose success depends mainly on exports of rawcommodities. To achieve long-term sustainable growth at a rate that would

allow for a relatively rapid convergence between living standards in Russia

and the OECD countries, such dependency on natural resources should bereduced through the diversification of economic activities, with a view to

capturing new growth opportunities in knowledge-intensive areas, whileproviding resource-based industries with advanced technology that would

allow for further improvement of their productivity. Boosting innovationshould be a central objective of a diversification strategy.

Innovation in Russia: performance, obstacles and opportunities

Russia’s innovation performance is strikingly modest compared to whatcould be expected in light of its accumulated stock of human capital with

scientific skills and engineering know-how, and given its overall investmentin R&D as well. For example, in 2002 only about 10% of industrial enter-

prises reported innovations (compared to 50% in the European Union) andRussia’s share of world trade in civil science-based products is estimated atonly 0.3 to 0.5%, while Russian exports of technologies are ten times less

than those of a small country like Austria.

Not only is the overall level of innovation activities low, but with a few

exceptions, innovation patterns are biased towards incremental improve-

ments or adaptations of the existing and mostly outdated capital stock andtowards non-technological innovation that serves the most dynamic marketsat this stage of the growth process (e.g. new business models, marketing,design). Consequently, science-based innovation, which is on the rise in

most OECD countries due to both active commercialisation strategies of

public research organisations (PROs) and strong demand for scientificinputs by industry, remains quite marginal in Russia and is mainly supply-


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8 - MAIN FINDINGS AND POLICY RECOMMENDATIONS


pushed (spin-offs from public research institutes or research-intensive state-owned enterprises, as part of their restructuring or liquidation process).

The Russian innovation system comprises solid building blocks

1

andislands of promising developments, but overall, it is not fully functional due

to structural imbalances, deficient incentives and adverse framework con-

ditions.

Structural imbalances and weak linkages between actors

• The bulk of R&D is still carried out within (overly) numerous publicorganisations and financed by the government budget.

• The business sector, including foreign firms, and higher education are

both minor actors in R&D.2

• Despite considerable downsizing and restructuring over the last decade,the public R&D system remains highly fragmented (in terms of fundingand steering mechanisms), with the ensuing risk of “duplication withoutsynergies” (heterogeneous in terms of quality and type of research)

rather than diversified according to a sound division of labour); over-loaded with developmental activities as opposed to fundamental researchor ambitious R&D;

3 and poorly connected to both the education and the

market-driven production systems.

• Weak industry-science relationships (ISR) are preventing Russia frommaking the best use of its considerable human and knowledge capital.

ISRs appear to be sporadic, reflecting the lack of absorptive capacity in

industry but also the inexperience of the research sector in the transfer oftechnology and knowledge, and the lack of appropriate institutional

frameworks.

• Inter-firm diffusion of knowledge and innovation through networking ormarkets for technologies is still very insufficient.

1. The Russian science base remains relatively strong, despite an ageing body of

researchers and stock of equipment. Many world-class poles of excellence in basic

research have been preserved.

2. In 2001, business enterprises contributed only 20% of total R&D expenditure. In

2002, universities accounted only for 5.4% of federal funding for R&D.

3. According to official statistics, developmental activities, as opposed to basic and

applied research, accounted for more than two-thirds of total federal funding for

R&D in 2002.


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Deficient incentives and lack of intermediation

• The funding of public research institutes is not provided as part of a

systematic policy. The state funding of R&D results from a combinationof budgetary channels and programmes whose objectives and priorities

are set independently. As a result, the institutes operate opportuni-

stically, seeking funding via contracts from private industry, state enter-prises and the rest of the public sector, or from innovation supportprogrammes. Many organisations (and to some extent individuals withinorganisations) have been entrepreneurial in developing their own “local

innovation systems”, but these cannot add up to a coherent macro

system.

•

This is compounded by uncertainties regarding the ownership of tangibleand intangible assets (e.g. IPR). Such uncertainties complicate colla-boration with private firms, inhibit technology transfer, impair the

development of spin-off companies into independent and growing busi-nesses, create conflicts of interest for institutes themselves, and may

even give rise to conflicting goals between individual researchers andtheir organisations.

• This also contributes to the underdevelopment of intermediary institu-tions, including market-based technological services which are indepen-

dent from both suppliers and users of knowledge.

Adverse framework conditions

• Excessive returns in low-risk/non-innovative activities (due to, forexample, the lack of competition or inadequate regulation) together withlegal uncertainties (e.g. regarding IPRs) that increase transaction costs

within the innovation system reduce the incentives of cash-rich firms to

invest in innovation.

o

The three basic mechanisms of an efficient dynamic allocationof resources do not function properly in Russia, i.e. a corporate

governance that ensures forward-looking re-investment ofearnings; a financial system that is capable of managing the

risks of innovation-related investment; and an active govern-ment policy to use part of the economic rents from exports of

raw materials to finance investments in the knowledge infra-structure through an ambitious technology and innovation

policy.

•

A weak banking system, and small and illiquid financial markets.


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• Lack of consistency among different policies regarding their impact oninnovation (e.g. trade policy, labour legislation, procurement policy, taxpolicy, etc.).

• A grey area (which is still large) between the private and public sectorswhere actors have a legal status and governance structures which are notthe most appropriate to make them either efficient market players orefficient components of the knowledge infrastructure.

• Lack of a clear government commitment and strategy to improve suchframework conditions, as part of an explicit and comprehensive tech-nology and innovation policy. There is a striking contrast betweenofficial statements regarding the need to initiate a new growth trajectory

in order to double GDP, and rather patchy initiatives in the field of S&Tpolicy.

The fact that under such conditions R&D-intensive activities are

flourishing in some sectors (e.g. the software industry) and that techno-logical upgrading and organisational innovation has been very successful in

others (e.g. the foodstuffs industry) is an indication that, once certain keyrequirements are met, Russia has the necessary capabilities, notably in terms

of entrepreneurial spirit and highly skilled labour, to position itself favour-

ably in global innovation networks.

Boosting innovation: the role of government

The experience of OECD countries demonstrates that (1) the govern-

ment has a vital role in promoting innovation-driven growth since inno-

vation processes are affected by endemic market and systemic failureswhich need to be corrected; and (2) government promotion of innovation

requires the contribution of different policies according to an overall

coherent strategy. The Russian government has the additional task ofcompleting the set-up of all the institutions, including legal and incentive

frameworks, which make up the innovation systems of mature marketeconomies.

Improving framework conditions for innovation is a continuous, un-ending process which in most countries often only requires fine tuning andimproved co-ordination of policies in areas such as macro-economic

management, education, competition, corporate governance, labour markets,energy, banking and financial markets, IPRs, etc. In Russia, the challenge is

greater since its transformation into a full-fledged market economy is still

underway. It would be beyond the scope of this report to discuss in detail all


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aspects of this transformation that are important from an innovationperspective. However, four priority actions ought to be highlighted:

•

Strengthen the mechanisms for inter-ministerial co-ordination on inno-vation issues. The new Council on Competitiveness and Entrepreneur-ship may provide an important contribution, if it is entrusted with a

substantive agenda that includes a role in defining a clearer nationaltechnology and innovation policy strategy,

4 in co-ordinating government

support to R&D that involves several ministries, and in checking that

broad reforms in other fields are consistent with the national innovation

strategy.5

• Remove specific regulatory impediments to innovation. One example

that requires serious consideration is the regulation of domestic energyprices which still artificially increases comparative advantages enjoyedby energy-intensive export sectors to the detriment of knowledge-basedactivities, and reduces incentives for energy-saving innovations.

• Remove uncertainties regarding intellectual property rights (IPR). Thedraft new law on IPRs derived from publicly funded research, which

transfers ownership to the research institutions, is a good initiative which

follows international best practices. It should be enforced rapidly.

• Define a pro-innovation procurement policy. Despite some recent im-

provements in the system of state R&D contracts, there are neither clear,agreed principles nor an articulated strategy concerning the role of the

public sector as lead user of innovation through civilian procurement

policy.

4. Russia has employed a variety of instruments in pursuing its technology policy. Such

experimentation is entirely appropriate particularly as the design and implementation

of innovation policy is, in comparison with most OECD countries, at an early stage.

However, there needs to be a framework for monitoring and learning from policy

actions. Russia should develop own systematic approach to the ex ante appraisal,

with concurrent monitoring and ex post evaluation of innovation policy instrumentsand schemes.

5. These include competition policies to increase innovation-driving rivalry but also to

facilitate collaborative research; education and training policies to develop the

necessary human capital; regulatory reform to lessen administrative burdens and

institutional rigidities; financial and fiscal policies to ease the flow of capital to small

innovative firms; labour market policies to increase the mobility of personnel and

strengthen tacit knowledge flows; communications policies to maximise the

dissemination of information and enable the growth of electronic networks; foreign

investment and trade policies to strengthen technology diffusion worldwide; and

regional policies to improve complementarity between different levels of govern-

ment initiatives.


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The contribution of science and technology policy

Securing conducive framework conditions is a necessary but insufficientcondition for boosting innovation. The specific contribution of science and

technology policy is vital and central in any innovation strategy. The mainobjectives, in broad terms, have no reason to be different in Russia than inOECD countries, namely: to support basic and long-term research while

ensuring that it is responsive to the evolving needs of the economy andsociety; to correct market failures which lead business firms to under-investin R&D and innovation; to provide the infrastructures needed for the

diffusion of knowledge and technologies throughout the economy; topromote co-operation among all actors to fill gaps in research capabilities;

and to foster innovation in areas of strategic interest.

But the prioritisation and nature of specific actions to achieve such

objectives must reflect specific Russian conditions.6

In this regard, some

recent initiatives address the most important issues, but some are still ill-defined or immature and are thus in need of strong political backing for

quick finalisation and ambitious implementation, while others should be

scaled up and/or complemented by other actions in order to have a moresizeable impact:

• Restructuring of the public research sector (PROs) is still lagging,although new initiatives are in the pipeline. An inventory/assessment ofPROs belonging to the Russian Federation has been completed, in-

cluding strategic directions for the streamlining of steering mechanisms,

privatisation of some PROs and liquidation of others.

• An important related subject under consideration is the reinforcement ofuniversity research, and more generally the strengthening of all linksbetween research and education. This would correct a fundamental im-

balance in the Russian innovation system.7

•

An important emphasis is placed on the promotion of small innovative firms, including new technology-based firms through project-based

support (e.g. The Foundation for Assistance to Small Innovative Enter-

6. These conditions are imperfectly known by the government which would require

more indicators and information on, e.g., privately financed and performed R&D,

spin-offs, patents, licensing, human resource mobility, research consortia, incubators,

etc.

7. The OECD has provided evidence that social return was on average greater for

university-based research than for research in public laboratories.


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prises), often spin-offs from public research (using generic SME supportinstruments and others, such as Venture Capital or the new Start

programme). These programmes are commendable but can have only a

relatively small impact on economic structures and national innovationcapabilities in the short to medium term. To have greater and quicker

impact, they should be scaled up and complemented by initiatives thatintegrate small and medium-sized enterprises (SMEs) in broader inno-

vative networks comprising larger firms and relevant PROs.

• Regarding the development of appropriate infrastructures for knowledge

and technology diffusion, an experimental programme has just beenlaunched: six technology transfer centres (TTC) have been created in six

regions to promote commercialisation of R&D results created using

public funds. However, it is still unclear how such new intermediarieswill complement or compete with smaller intermediary structures thathave proliferated from bottom-up and uncoordinated initiatives.

Furthermore, there are other needs which should receive greater

attention:

• Refocusing PROs on fundamental long-term research and involving

more end users in the financing of public research. This will hopefullybe facilitated by the current restructuring of PROs (as discussed above).

However, this selection and consolidation process cannot be achievedsuddenly and should be encouraged on a continuous basis for quite along period through improved funding mechanisms. From this long-term

perspective, funding mechanisms should ensure that developmentalactivities are further reduced (abandoned, taken over by the productive

sector, and only pursued with government support in areas of strictlydefined national interest), that applied research is only pursued when

there are clear public or private end users ready to co-finance, and that

basic and long-term research is supported subject to strict conditionsregarding quality, critical mass, and links with education. Overall, this

would entail increasing the share of both institutional funding and trulycompetitive funding, to the detriment of other streams of project-basedfunding.

• Research infrastructure should be maintained, and often revamped and

developed in promising areas. Financing should not suffer from changesin the approach to research funding. Here Russia could implement

proven international good practices (e.g. establishing special funds with

the participation of the major project-funding bodies, or making project-funding bodies bear the full costs of research carried out by PROs).


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• Concentration of resources in selected research fields that are linked tothe most pressing social and economic needs. This could involve thecreation of multidisciplinary research centres or networks that serve both

to concentrate expertise in particular fields and to foster research at thenexus of several disciplines.

Fostering industry-science relationships (ISRs) through public-private

partnerships (P/PPs): a priority task

In all countries ISRs are increasingly important for a number of reasons:

• Science-based technologies such as electronics, pharmacology, biotech-nology and nanotechnology have moved to the forefront of innovation.

• The rise of computer-aided design and computer-aided manufacture hasresulted in a move away from craft-based technology to technologybased on more formal bodies of knowledge in many engineering sectors.

• The horizontal spread of science-based technologies such as newmaterials, new coatings and adhesives, advanced analytical and measure-

ment methods, catalysts based on nanoscience extend to many traditionalindustrial sectors.

• Individual products and processes are incorporating an increasing rangeof technologies and even the largest firms are having to source techno-

logical knowledge and research from outside.

Science contributes more regularly and more directly to industrial

innovation today than in the past. The changing nature of scientific researchmakes earlier distinctions between basic and applied research less clear andless policy-relevant. An effective interface between innovation and science

systems is therefore more necessary than ever to reap broad economic andsocial benefits from public and private investments in research and to ensure

the vitality and quality of the science system itself.

In Russia, there are additional reasons to focus on the improvement ofISRs since this would trigger other desirable changes in the research and

productive systems, such as increased propensity of firms to invest in R&D,

competitive selection of high-quality fundamental research with economicrelevance, concentration of resources in selected fields of strategic impor-

tance for the economy and society, and consolidation of the R&D systemthrough improved collaboration between institutes with complementary

capabilities.


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There are many channels of ISRs (informal contacts, spin-offs, mobilityof researchers, collaborative research, licensing, contact research) and

several ways for government to strengthen each of them. As other countries,

Russia must devise its own overall coherent strategy to increase the intensityand quality of ISRs by combining different policy tools: regulatory reform

(e.g. facilitate the possibility for public researchers to work with or inindustry) institutional building (e.g. technology licensing offices in PROs)

or financial incentives (stimuli for co-operation with business and support tospin-off formation).

However, given the currently very low ISR intensity in Russia, their

geographical rather than sectoral polarisation and the disproportionateimportance of informal channels, the priority should be to introduce

measures that address the weakest part of ISR, collaborative research, andhave a catalytic effect in promoting the balanced development of all otherISR channels and associated positive changes in the innovation system.

Public-private partnerships (P/PPs) are the best catalytic measures thatcould be envisaged, based on OECD countries’ experience.

8 They take a

variety of different forms and can be used to address a number of differentpolicy issues,

9 but their major contribution is in supporting collaboration

between private firms and universities and PROs to undertake R&D.

8. They represent a growing and already sizeable share of total national S&T budgets

(e.g. more than 6% in the Netherlands) and often now the bulk of competitive

funding for technological development (e.g. almost 80% of competitive grants

financed through the Funds for Technological Research of the French Ministry of

Research).

9. Funding early-stage technology development; providing a means by which univer-

sities, PROs and private research contractors can be funded to help companies

(usually SMEs) upgrade their technological competences; fostering the development

of technical standards needed for innovation-friendly regulation; enhancing the capa-

city for innovation and economic competitiveness of individual regions or local areas

and the development of high-technology geographical clusters; enabling innovation

in goods and services purchased by public sector bodies and promoting the develop-

ment of technologies, products and services to meet the needs of the public sector

and social needs more generally.


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Promoting P/PPs: recommendations

P/PPs are not unknown in Russia but their number, size, technologicalscope and geographical spread are very limited. This is due in large part to

the lack of industry motivation, but also reflects to some extent misunder-standings (or false expectations) as to what P/PPs are about. They are toooften seen as a mere financing instrument with which actors could attract

additional funding without altering their research agenda. There is thus roomfor both improvement of existing schemes and new initiatives that wouldcontribute more decisively to increase the breadth, depth and economic

relevance of the national R&D portfolio.

Consolidating and expanding existing initiatives

The existing three main Russian P/PPs (Megaprojects, Biotechnology

for Medicine and Agriculture, Technology Transfer Centres) are rather

recent and experimental but do show promise.

• There would seem to be scope for further rounds of Megaprojects. Onlywhen the quality of applications begins to fall will the scheme have

come to its natural conclusion. However, continuous monitoring of theprogress of projects is vital to make sure that they are achieving theirobjectives. One problem which will need to be dealt with is how to treat

enterprises which are involved in applications in two or more successiverounds.

10

• The inter-ministerial programme “Biotechnology for Medicine and Agriculture” is concerned with a cluster of technologies in the earlystages of their development and where SMEs and start-up firms areplaying a major role in every major country. It therefore bypasses to a

significant extent the problems of the more established areas of Russian

industry. This type of programme could be repeated in similar tech-nologies, e.g. nanotechnology, or as a follow-on programme to support

the next stage of developments in biotechnology.

• The six Technology Transfer Centres (TTCs) are a pilot. If this proves

successful, the programme should be rolled out on a much greater scalewith a much greater number of centres attempting to cover the whole

10. Some of them will be the firms which are most keen to increase their competi-

tiveness and innovation performance, others may simply be opportunistic firms

which have learned quicker than others how to take advantage of new forms of

government support.


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country. Similar centres that have been created as a result of local andother bottom-up initiatives should be eligible to apply.

New initiatives

Another aim should be to create types of P/PPs not yet deployed in

Russia, following a two-tier approach. The first objective should be to betterexploit the potential for full-fledged P/PPs in selected research areas through

pilot programme(s) and preparatory work:

• Programmes of long-term collaborative research conducted jointly byenterprises and PROs. The scope for doing this will increase with thetechnological/innovation capacity and competitiveness of Russian

industry. If large Russian firms can build up significant competitivepositions in international high-technology markets then they willnaturally develop the same need to access advanced knowledge as their

counterparts in the United States, Western Europe and Asia. Some

private and state-owned enterprises are probably already in this situation.A pilot programme, following a proven model (Box 1), could be

launched in the relevant technological areas. If successful, it could bereplicated in others and exert a demonstration effect throughout theinnovation system.

•

Pro-innovation public procurement . As part of an overall national tech-nology strategy, Russian government departments and agencies shouldfirst aim to build up a picture of their long-term needs for technologies

and high-technology products. They should then aim to research these

technologies in co-operation with potential suppliers and PROs. Wherefeasible, this should be done by putting out research projects to competi-

tive tender from industry-science partnerships.11

The second objective, to be pursued simultaneously, would be to lay the

groundwork for any future P/PP to build on established contacts and exist

with or without government intervention. This could be achieved by helping(public and private) enterprises build their technological and R&D compe-

tence. This would help improve networking between institutes and enter-prises which could be further encouraged through three types of comple-

mentary initiatives.

11. This kind of approach accounts for the bulk of public support for technology

development in the United States.


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Box 1. Designing a P/PP programme to foster collaborative research:

A template

Objectives

To provide a stable and stimulating institutional framework for co-operation between

a number of PROs and industrial firms on R&D projects that are of strategic

importance for partners and the Russian economy.

Launch

The government defines terms of reference (regarding the minimum number and

identity of partners, their research field and agenda and their readiness to commit the

necessary level of resources), states the form, conditions and duration of its support

(between four to seven years in order to allow for ambitious R&D), and invitesconsortia (of firms and PROs) to submit proposals in the form of “business plans”,

together with the credentials of would-be participants. Compared to Megaprojects,

the research programmes would be more broadly defined, since the detailed research

agenda should be left to the decision of the partners themselves.

There are two main variants: (1) the government does not express any preference

regarding technological fields; and (2) the government selects specific technological

areas as the only ones eligible for support. This second option would be preferable

for Russia at this stage. This would require that a governmental commission, in

consultation with representatives of PROs and industry, determine the area(s) where

there is the greater chance to find competent and motivated participants, especiallyon the industry side, and where enhanced innovation would yield significant benefits

for the Russian economy (e.g. new materials, optoelectronics, advanced polymers,

software and multimedia, etc.)

Eligible participants

Private (large and small) firms, state-owned industrial firms, research institutes, and

universities. Subsidiaries of foreign firms should be allowed and even encouraged to

participate. A candidate consortium should comprise a minimum number of firms

and at least one institute and one university. A possibility to be considered is to

include geographical breadth of consortia among selection criteria.

Selection process

This should be a transparent competitive process, with clear criteria and impartial

referees. The scientific quality of proposals would be assessed through an indepen-

dent peer review. Peers (around six per proposal), including foreigners, could be

selected by a joint panel of the Academy of Sciences and the top universities in the

field. Preferably, the economic and organisational dimensions should be assessed by

a consultant company with an international experience. The final decision, based on

this dual evaluation, would be taken by the Ministry of Science and Education.


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Box 1. Designing a P/PP programme to foster collaborative research:

A template (continued)

Organisation/management

There are two basic models: virtual institutes with a lean organisation at the core and

research being done at the participating PROs and firms; co-operative research labs

where most activities occur at a central location. Each has advantages and dis-

advantages and government should impose only minimal requirements. The choice

should be made on a case by case basis, depending on the technological area and

capabilities of actors.

Co-operative research centres or networks should be more than ad-hoc contractual

arrangements and have an institutional identity (e.g. legal status of foundations) and

their governing board (with industry holding if possible a majority of votes in orderto ensure its commitment and avoid a drift towards research with no end-users)

should enjoy a large autonomy in determining their detailed research plans.

Financing

The basic principle is a tri-partite arrangement with resources (in cash or in kind)

coming from three sources: government budget, industry and PROs. There are

different formulas, but as a rule, government subsidy should not exceed 50% and

industry contribution should represent at least 20%.

IPRs

A key requirement is that all participants could have the authority to negotiate IPRs.

Pending definitive decisions regarding the draft Law on IPRs, the solution imple-

mented in the case of Megaprojects would be practical. Whereas government could

provide broad guidelines, detailed agreements should be left to participants. But the

existence of a clear and firm agreement among participants should be made a

condition of eligibility in the selection process.

Monitoring and evaluation

A representative from the Ministry of Education and Science would be part of the

governing board of each P/PP. In addition, annual reports on activities would bemandatory. A mid-term light evaluation (after 2-3 years) would check progress in

achieving stated goals. A full-fledged evaluation would be carried out after 4-7 years.

Depending on the results, public support could be renewed for another term, reduced

or removed. In the latter case, the co-operative venture would close or become self-

sustained. Self-sustainability should be an important objective in the Russian context

since one major objective of P/PP is to increase R&D capabilities of businesses.

However, there should be some degree of flexibility in that some pre-competitive

research in important areas could deserve permanent public support.


20/95



• Building up the competence of state (and private) enterprises. Companiesshould consider to what extent the existing breadth and depth of theirknowledge base can be maintained. They should identify those areas

where, with the help of RAS institutes and/or universities, they canmaintain their technology at the leading edge; other areas should be

abandoned. Each state-owned company could be asked to draw up a

strategy for developing its technological competences including a fulldescription of the external links which it proposes to exploit. This would

include joint research projects with RAS institutes/Russian universities as

well as a plausible business plan for exploitation (which could involvepartnerships with foreign companies). Subject to independent appraisal,

such plans should attract government support according to clearly definedrules. This might take the form of direct grants to the company, tax relief

or support for research at partner institutes. Such strategies might be

voluntary for private companies but if they pass the same appraisal testthey should be eligible for the same government support. If companies

lack the ability to draw up such strategies, external help could be madeavailable (consultants, higher education institutions, etc).

• Developing networks of actors. One option would be to introduce some-thing similar to the Austrian MAP programme to build up nationalnetworks based on self-defined structures and thus breaking out of theestablished pattern of personal, corporate and local relationships (Box 2).

Such a programme would bring together different public (policy makers,programme managers, agencies, etc.) and private (incubators, trade asso-ciations, SMEs, large firms, etc.) bodies so that they can get in contact, co-

operate more closely and exchange experience.

• Small project teams. There are many areas where industry could be

interested in establishing working contacts with public research but cannotyet identify opportunities for full-fledged P/PPs. Project-based support to

small teams of researchers from both industry and PROs could be grantedon a competitive basis through a P/PP fund co-financed and co-managed

by government and industry. As part of a strategy to reinforce universityresearch it could be requested that research teams include at least oneuniversity researcher.

12 There are different models for the detailed design

of such a programme, the oldest being the IUCs programme of the USNational Science Foundation and, among the newest, the Linkage Projects

of the National Research Council of Australia.

12. This would complement the rather small support that is currently provided through

the “Integration of Science and Higher Education in Russia” programme.


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Box 2. A Russian MAP?

MAPs (Multi Actor and Multi Measures Programmes) are complex funding

programmes addressing not one individual firm or research institution but whole

(sub-)systems of innovation (e.g. science-industry co-operation, etc.). A MAP

networking programme aims to facilitate the exchange of information between a

whole range of initiatives, both local and national, involving programme managers,

participating organisations and policy makers. Mechanisms include the building of

personal contacts, networks, workshops, etc. This facilitates learning and helps to

eliminate duplication (for example, similar research projects being carried out

separately in two different locations by two different sets of participants).

As a consequence, platforms on which P/PPs might be conducted successfully

could “metastasise” following a defined structure as suggested in the three-stepmodel below:

• First, “get to know each other” on a national level by a structured and

planed process.

• Second, good practice exchange (national and international levels) and as

a consequence, establishment of new good practices (“define your own

tools”).

• Third, road map or manual; creation of “institutional knowledge” (“define

your own solutions and rules”).

The relevance to a large country like Russia with an inadequately networkedinnovation system would seem clear though the scale may need to be closer to that

of an EU-wide initiative (e.g. the EU MAP-TN international) than that of an indi-

vidual EU country.


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Financing public support to P/PPs

How to finance the expansion of existing promising initiatives and the

launch of new ones? This question is difficult to answer without a detailedknowledge of the Russian budget and fiscal policy and without entering

fields which are out the scope of this report. However, one can suggest someguiding principles and venture one suggestion. The restructuring/stream-

lining of PROs and reform of funding mechanisms should provide part ofthe solution.

13 But relying only on a reallocation of existing budget lines

would probably be neither feasible nor desirable. It is important that “newmoney” be mobilised, for several reasons: the need to reach critical mass insupport programmes so that they can make a real difference, to avoid un-

necessary conflicts within the research system, and to motivate the actors byrewarding their efforts to contribute to economic development and sending

them a strong signal about government commitment to innovation.

One idea to be considered, whose rationale is the transformation ofdepletable resources into knowledge, is the creation of a special “Fund for

Knowledge Infrastructures and Competitiveness” to be endowed by a very

small levy on oil and gas exports. Its strategic steering (allocation of fundsto different Ministries) could be entrusted to the Council on Competitivenessand Entrepreneurship, while the detailed management (use of funds forspecific programmes) could be left to the relevant Ministries (Ministry of

Education and Science for P/PPs for research). This would follow theexample of some OECD countries that are rich in natural resources, e.g. theNetherlands, where the CES/KIS Fund uses proceeds from exports of

natural gas to finance projects related to the development of knowledgeinfrastructures.

14

13. Russia’s ability to promote innovation could prove to be more efficient when it is not

forced to spread resources, but to combine them. Closer linkage between policy,

science, education and industry (including both SMEs and larger firms) - all of

which should be included in these efforts - will prove its worth within a very short

time period and may yield substantial economic benefits in the long term.

14. The CES/KIS Fund will provide EUR 800 million in support to P/PPs for the 2003-

2010 period, i.e. an annual average amounting to half the total budget for P/PPs in

2003. In other words, the CES/KIS Fund provides almost as much in resources as the

budget for public support to P/PPs in the Netherlands.


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FROM STEADY TO SUSTAINABLE GROWTH: THE “DIVERSIFICATION THROUGH INNOVATION” IMPERATIVE - 23


Chapter 1

FROM STEADY TO SUSTAINABLE GROWTH:

THE “DIVERSIFICATION THROUGH INNOVATION”

IMPERATIVE

“The major economic challenge facing Russia is the achievement oflong-term, sustainable growth that would allow for a relatively rapid con-

vergence between living standards in Russia and the OECD economies”(OECD Economic Survey of the Russian Federation, 2004). In this regard,an overriding policy objective should be to make Russia’s economy lessdependent on exports of a limited range of natural resources and capable to

better exploit the new growth opportunities brought about by the emergence

of a global knowledge-based economy.

There are many aspects of its recent economic achievements for which

Russia should be praised,

1

but there are also many reasons to question thesustainability of the current growth trajectory of the Russian economy,

however dynamic it may look. Whereas economic growth since the August

1998 financial crisis has consistently exceeded expectations, its rate is stillinsufficient to meet the stated ambitions

2and its main drivers can hardly be

long-lasting without deep structural changes:

1. The post-crisis recovery has been faster and more sustained than most observers

believed possible. Real GDP grew at an average of 6.7% per year during 1999-2003,

with positive effects on wages, income and employment. Real disposable income

grew by 12% between 1997 and 2003, and real wages by 25%, while unemployment

fell from a peak of 13% in 1998 to 9% in 2003. Government policy played a positive

role in many respects, e.g. a prudent fiscal policy together with significant progress

with structural reforms on a broad front (tax, pensions system, new land, labour and

customs codes, new laws on joint stock companies and bankruptcy, etc.).

2. To double the GDP in 10 years, a goal set by the Russian President, growth rates will

have to be over 7% per annum over this period.


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24 - FROM STEADY TO SUSTAINABLE GROWTH: THE “DIVERSIFICATION THROUGH INNOVATION” IMPERATIVE


Figure 1.1. Income, consumption and imports

Index 2000=100, seasonally adjusted (SA)

Source: Reproduced from the OECD Economic Survey of the Russian Federation, 2004.

• On the demand side, a consumption boom, rather than net exports,

3 due

to the combined effect of rising real disposable incomes and exchange

rate appreciation. This has boosted imports without putting the externalbalance of the economy in danger thanks to a surge in the value of oil

exports.

• On the supply side, the economy experienced a strong increase in total

factor productivity despite low investment rates in most sectors4

becausemany enterprises could draw on idle or under-utilised, although often

obsolete, capital stock, and could enjoy lower labour and other costs inthe wake of the rouble’s devaluation.

Against this, a number of developments point to the fact that the

current growth process does not induce by itself all the structural changesnecessary to ensure its long-term sustainability:

3. At least from mid-1999.

4. Investment as share of GDP has been around 18%, which is below other catching-up

economies in Eastern Europe and Asia, and also well below the OECD average of

about 22%.


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FROM STEADY TO SUSTAINABLE GROWTH: THE “DIVERSIFICATION THROUGH INNOVATION” IMPERATIVE - 25


• While overall economic growth has been progressively broader-based,

with the service sector increasing its contribution, particularly in 2002-

2003, industrial production has been overwhelmingly driven by resource

sectors (Figures 1.3 and 1.4). Engines of growth remain over-concentrated in a handful of industries whose success mainly depends

on exports of raw commodities, foremost petroleum products andnatural gas. Indeed, decomposition of Russia’s growth rates after the

1998 crisis shows that growth rates of 5% or higher have been achievedonly at times when oil prices have been rising fast.

• Russia has seen a further deepening of its major comparative advantages

and disadvantages between 1997 and 2003 (see Annex 1, Table A1.1).The oil and gas sector has developed faster than the rest of the tradable

sector since the second half of 2002. One obvious explanation is thecurrent high demand, hence record-high prices for these commodities.

Another is that regulation of domestic energy prices still artificiallyincreases comparative advantages enjoyed by energy-intensive export

sectors. Yet another explanation is that too many industries are not

competitive due to the still poor price-quality ratio of their products.

• This has led to an increasingly uneven income distribution, which is

socially problematic5 and economically unsound.

6

• The contribution of FDI to the enhancement of productivity has beendisappointingly low, except in a few sectors where branding moderni-sation strategies allow a quite quick and profitable access to a large

domestic market (e.g. tobacco, brewing).

5. Quite impressive aggregate growth has not yielded an equally impressive increase in

the well-being of the majority of the population. By 2001, salaries of 24% of those

employed in industry, and of 81% employed in agriculture, were still below the

official subsistence level.

6. Wage differentiation across sectors has not reflected developments in productivity

(see Figure A1.1 in Annex 1), largely because of large-scale rent-seeking in the oil

and gas sectors. It is particularly striking that gas sector wages, which were already

almost four times the average for industry as a whole in 1997, increased at

exceptionally high rates between 1997 and 2003, even as labour productivity fell by

over 20% during this period while increasing almost everywhere else.


26/95



If unabated, the current tendencies will make Russia an even moreresource-dependent economy. This bears a number of risks: slighter chances

of sustaining the high growth rates that are necessary to catch up with

advanced economies; vulnerability to fluctuations in world commodityprices; a danger of real estate and financial bubbles since a massive inflow

of petrodollars pushes up prices in the non-tradable sector (the so-called“Dutch disease”) and swamps the financial system with liquidity; and an

income distribution which is not in line with long-term trends in pro-ductivity, to the detriment of knowledge-based activities.

7

Diversifying Russia’s economy is the only way to mitigate such risks by

initiating a new growth trajectory. Diversification does not mean weakeningthe export-oriented natural resource-based sectors, which will remain for a

long time key sources of wealth, but increasing the competitiveness andknowledge-intensity of the non-commodity tradable sectors. The diversifi-cation agenda is broad but involves some essential tasks: creating afavourable business environment, improving the quality of human capitaland business infrastructure, and radically increasing the efficiency of the

innovation system. Boosting innovation is probably the single most

important objective because it can federate a whole range of policiestowards a common strategic goal, and because it requires mobilising what is

Russia’s most ill-used asset, an important stock of human capital withscientific expertise and engineering know-how.

7. Vladimir Drebentsov, “Diversifying Russia’s Economy: Key to Sustainable Growth”,

unpublished paper.


27/95

FROM STEADY TO SUSTAINABLE GROWTH: THE “DIVERSIFICATION T


Figure 1.2. Decomposing growth

Percentage growth



28/95


FOSTERING PUBLIC-PRIVATE PARTNERSHIP FOR INNOVATION IN RUSS

Figure 1.3. Contribution to GDP growth

of the main economic activities

Figure 1.4. Contribu

sectors to industr

Percentage of GDP in previous period Per



29/95

THE RUSSIAN INNOVATION SYSTEM: MAIN FEATURES, STRENGTHS AND WEAKNESSES - 29


Chapter 2

THE RUSSIAN INNOVATION SYSTEM:

MAIN FEATURES, STRENGTHS AND WEAKNESSES

Weak innovation performance

Russia’s innovation performance remains strikingly modest. In 2002,

only slightly more than 10% of industrial enterprises reported innovations

(compared to 50% in the European Union) and Russia’s share of world tradein civil science-based products is estimated at only 0.3 to 0.5%, while

Russian exports of technologies are ten times less than those of a smallcountry like Austria. Another indication is the very low proportion of

Russian inventions that are implemented in practice, reflecting not only amismatch between the orientations of the research system and the needs ofthe economy, or regulatory obstacles to the commercialisation of research

(e.g. unclear IPR legislation), but also the lack of innovative end users.1

Arevealing fact is also the exceptionally high dependency of the Russianeconomy on imports of products, such as investment goods and consumer

durables, for which technological innovation is key to international competi-tiveness.

Not only is their overall level low, but innovation activities generally

lack ambition when they concern products and processes or are otherwisemainly linked to the adoption of foreign best management and marketing

practices (e.g. new business models, marketing, design) in sectors that serve

the most dynamic parts of domestic markets at this stage of the growthprocess (e.g. food and beverages, distribution). Technological innovation is

primarily aimed at incremental improvements or adaptations of the existing

1. Whereas at the end of the Soviet period about 30% of inventions were implemented

in practice, in the early 1990s this ratio fell to 7-8%, and since 1997 it has been

below 2%.


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30 - THE RUSSIAN INNOVATION SYSTEM: MAIN FEATURES, STRENGTHS AND WEAKNESSES


and mostly outdated capital stock.2 Consequently, with a few exceptions,

science-based innovation remains marginal in private firms and occurs

largely as the by-product of the painful restructuring of the public sector

(spin-offs from public research institutes or research-intensive state-ownedenterprises, as part of their restructuring or liquidation process). All in all,

this explains why the vast majority of innovative firms are not trying toenter foreign markets and thus fail to experience the full stimulus of

competition for ingenuity and quality, although there are already brightexceptions, as in the software industry (Box 2.1).

Box 2.1. Software: a booming export-oriented knowledge-based industry

Russia is experiencing very rapid growth in software design and development, and related research.

This “Russian software development revolution” is comparable to those in India and Israel. The mainproducts are: general-purpose software packages, software packages customized for companies’ needs,

integrated systems, and information security. Offshore programming plays an important role. The

market is dominated by small and medium-sized companies which occupy small market niches, so they

do not compete with each other, but with foreign software developers both in the domestic and

international markets. The most successful ones are small companies with flexible organisational

structures founded on the basis of major universities and research institutions and inheriting their major

competitive advantages, as well as R&D centres established in Russia by international ICT corpor-

ations (see Box 2.2).

Figure 2.1. Dynamics of Russian software exports

Source: Market Visio/EDC, November 2000; Fort Ross, July 2004.

2. The major share of expenditures on innovation by the Russian enterprises is spent for

the acquisition of machinery and other investment goods, including imports of often

rather obsolete equipment. In 2002, R&D represented only 13.6% of these inno-

vation expenditures.


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Box 2.1. Software: a booming export-oriented knowledge-based industry (continued)

Figure 2.2. Main offshore programming centres in Russia

Source: Fort Ross.

Severe inefficiencies within the Russian innovation system (Annex 1,Figure A1.2) explain such disappointing performances. This system com-

prises solid building blocks and islands of promising developments but,

overall, it is not fully functional due to structural imbalances, deficient

incentives and adverse framework conditions.

Structural imbalances and weak linkages between actors

After a collapse in the initial stage of the economic transformation, total

R&D expenditures of Russia have grown steadily, with an acceleration since2001 but, as a percentage of GDP, they remain far below those of the

majority of OECD countries (Figure 2.3). The bulk of R&D is still carried

out within a very large number of public organisations and financed throughthe government budget (Table 2.2). The institutional complexity of the

Russian research system - in terms of legal status, ownership, and fundingmechanisms - makes it very difficult to draw a precise quantified picture.

The totality of scientific research but also the bulk of industrial research is

performed by the public sector in different types of organisations (see Table2.2): research institutes of the six Academies – especially the Russian


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Japan

United States

Total OECD

EU-15

Russia

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

1990 91 92 93 94 95 96 97 98 99 2000 01 02 2003

Academy of Sciences (RAS), university laboratories, design bureaus, theresearch branch of state-owned industrial firms, etc. The dominance of state-

owned organisations in the performance of R&D is illustrated in Figure 2.4

(see also Annex 1, Table A1.2).3

Figure 2.3. Evolution of total expenditures on R&D

Percentage of GDP

3. The fact that OECD internationally harmonised statistics indicate a relatively high

share of R&D performed by the business sector may in fact reflect a statistical

illusion. Private enterprises actually account for a rather low share of business R&D,

the bulk still being carried out in public or partly public industrial research institutes

or design bureaus. See D. Malkin, “ R&D trends in Russia: Decline of the S&T

System?” Economic Trends, Helsinki (2001).


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Table 2.1. R&D in Russia

2001 2002 2003

Total expenditure on R&D, USD million in current prices 3 607 4 306 5 641

As % of GDP 1.16 1.24 1.30

Government budget expenditure on R&D, USD million 2 029 2 470 3 267

As % of GDP 0.66 0.71 0.75

Total number of researchers 422 176 414 676 409 300

As % of total labour force 0.6 0.6 0.6

o Of which highly qualified researchers* 104 414 102 346 102 451

o As % of total number of researchers 24.8 24.6 25.1

* Candidates and doctors in science.

Source: Goskomstat.

Table 2.2. R&D by funding source and by performer

Percentage

1995 1998 2002

GERD by funding source

Government budget 61.5 53.5 57.4

Non-budget public funds and industry* 33.6 34.9 33.6

Other national sources 0.3 1.2 1.0

Foreign 4.6 10.3 8.0

GERD by performer

Government institutes** 26.1 25.8 24.5

Other public institutes and industry* 68.5 69.0 69.9

Higher education 5.4 5.2 5.4

Non-profit organisations 0.0 0.1 0.2

* All organisations whose major function is manufacturing, including those that belong to the state;private non-profit organisations that serve industrial enterprises: former branch R&D institutes, design

bureaus, experimental stations, development organisations.

** Mainly the research institutes of the Academies.

Source: Comparative Study of National R&D Policy and R&D Data Systems in the United States and

Russia, AAAS/NSF, 2001; Science in Russia at a Glance: 2003, Statistical Yearbook, 2003.


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Table 2.3. Number and types of organisations conducting R&D in Russia

1992 1995 1998 1999 2000 2001 2002

R&D organisations -- Total 4 555 4 059 4 019 4 089 4 099

From which:

4 073 3 906

Research institutes 2 077 2 284 2 549 2 603 2 686 2 676 2 630

from which academic institutes 729 787 775 782 807 819 810

Higher education institutions 446 408 393 387 390 388 390

Design bureaus 865 548 381 360 318 289 257

Development organisations 495 207 108 97 85 81 76

Industrial enterprises 369 348 267 319 317 319 289

Others 303 264 321 323 303 284 264

Source: Science in Russia, Statistical Yearbook, State Committee on Statistics of RF, 2001; Science in Russia at a Glance: 2003, Statistical Yearbook, 2003.

Figure 2.4. Ownership of the Russian R&D sector

Percentage of the total value of fixed capital, 2002

Source: Goskomstat.


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Among public organisations, higher education is a very minor actor inR&D. In 2002, universities accounted only for 5.4% of federal funding for

R&D. This is a legacy of the Soviet system which has not been corrected,

despite the relatively good research performance of university-basedlaboratories, compared to other research organisations, in terms of both

publications and contract research. Until very recently universities did noteven receive budgetary support for basic research. Only in 2003 did the

federal budget law open a new line to provide such support.

Overall, the Russian science base remains relatively strong, despite an

ageing body of researchers and stock of equipment, and brain drain which

was particularly severe in the second half of the 1990s. Many world-classpoles of excellence in basic research have been preserved. However, despite

some downsizing and restructuring over the last decade, the public R&Dsystem remains highly fragmented, with the ensuing risk of “duplicationwithout synergies”, heterogeneous (in terms of quality and type of research),rather than diversified according to a sound division of labour, and over-loaded with developmental activities, as opposed to fundamental research or

ambitious R&D. In 2002, according to official statistics, developmental

activities, as opposed to basic and applied research, accounted for more thantwo-thirds of total federal funding for R&D.

The Achilles’ heel of the Russian innovation system is the weakness of

corporate R&D, despite some encouraging developments over the last twoto three years.4 The efforts to transfer near-market research from public

organisations to business firms, to promote the creation of technology-basedfirms, to encourage private investment in R&D, and to attract R&D-

intensive foreign investment have not been entirely successful. The reasonsare many

5 but the fact is that business enterprises contributed no more than

20% of total R&D expenditure in 2002.6

In addition, although the empirical

evidence is weak, a reasonable guess is that the domestic business sector(private firms as well as state-controlled manufacturing and service enter-

prises) is mainly involved in the development part of R&D and has a

4. Russian firms seem to show a growing interest in financing R&D and in the creation

of their own in-house research facilities. The most active are resource extracting

industries. Thus, R&D divisions were opened at TNK, Yukos, Lukoil, Norilsk

Nickel, and Systema.

5. Innovation in industry, other than the adoption of best practices from abroad, appears

to be low and the capability to undertake it successfully seems not all that strong.

Profits, which in OECD countries generate much of the funding for innovation, are

also probably low in many sectors.

6 . In 2002, 5.6% of industrial enterprises had their own R&D division.


36/95



stronger propensity than its Western counterparts to import R&D asembodied in equipment. This has important implications for domestic

producers of such equipment, which find it hard to devise and finance a

survival strategy through technological upgrading and thus to sustain anambitious R&D agenda. They were too large, with deterrent liabilities, to

attract foreign investors. Apart from liquidation, their only perspective maybe to transform themselves into breeding places for new small enterprises

that try to match selected parts of their research and technological portfoliowith market opportunities (Box 2.4). This process of course entails the loss

of quite large portions of such portfolio, unless it is complemented by the

privatisation of those lines of business with market potential which arebeyond the capabilities of small new firms.

Foreign firms invest according to their global export and outsourcingstrategies, considering the comparative advantage of Russia and risk/rewardratios for different types of investment. So far, except in a few areas (e.g. ICTs, and oil exploration, see Boxes 2.3 and 2.4), this has generally not ledthem to establish R&D facilities in Russia or to be very active in creating

bridges between Russian science and markets. Foreign-owned firms are

probably in the classic MNE mode of using technology developed at hometo address the Russian market. Innovation is probably confined to near-

market development to adapt such technologies to the particular needs ofRussia. They are probably undertaking some more fundamental R&D in

areas where Russian science is particularly advanced, but this is mostlycherry-picking with mainly foreign markets in mind.


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Box 2.2. Foreign investment in R&D – the case of ICTs

Several leading foreign companies in the ICT business have opened research and development(R&D) or dedicated development centres (DDC) in Russia. Russia is increasingly competing with

India for software outsourcing projects, though some kind of division of labour may also exist.

According to Steve Chase, head of the Russian Intel branch, “Give the urgent projects to the

Americans, big projects to the Indians, and the impossible ones to the Russians”. There are also

some signs that Russian ICT experts who emigrated to the United States and Israel are catalysing

the software business in, and even moving their businesses to, Russia.

Sun Microsystems has three teams of programmers in Moscow, Novosibirsk and St. Peters-

burg, totalling around 150 experts. In the summer of 2004, the company set up its Engineering

Centre in St. Petersburg, with a total of around 150 developers.

Motorola has the most experienced DDC in Russia so far. Motorola’s DDC was established in

St. Petersburg in 1995 and now employs up to 350 developers.

Microsoft employs 150 people, mostly for sales and customer support. A programming team in

Moscow produces Microsoft programmes in Russian.

Intel: The purchase by Intel of two Russian technology companies, Elbrus and UniPro, has

increased the number of Intel researchers in Russia from 900 to 1 550 engineers and staff.

Huawei Technologies: China’s largest maker of telecom equipment has opened an R&D centre

in Moscow.

Cadence Design Systems: In 2004, the company opened an electronic design automation

(EDA) research and development centre in Moscow which will house more than 70

employees. It also will serve as centre for training, scientific endeavours and large-scale

educational programmes, as well as local customer support.

Metacommunications: This US software development company opened an R&D centre in

St. Petersburg in May 2004.

Boeing: For several years the company has employed a rather large group of developers based

in Luxoft, Moscow. Boeing employs a total of 40 workers in Moscow.

Dell Computers: A very similar job has recently been done for Dell by Luxoft.

LG Electronics: The company set up a development centre in St. Petersburg in the 1990s, and

now employs up to 30 developers there. Siemens set up an R&D team in St. Petersburg that concentrates on optical transmission.

Around 1 000 people, mostly involved in sales, are employed at Siemens’ Russian head-

quarters in Moscow.

Togethersoft was one of the first DDCs in Russia at the beginning of the 1990s. In 2003,

Borland acquired the whole team operating in St. Petersburg.

Source: TEKES.


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Box 2.3. The contribution of foreign investment to harnessing Russian scientific capabilities

to the benefit of the oil and gas industry:

The case of Schlumberger

Schlumberger is a leading company supplying technology, project management and information

solutions to the oil and gas industry. It employs over 50 000 people in 100 countries. Its revenue

in 2003 was around USD 10 billion. The company has been present in Russia since 1929, selling

products and services to Russian industry. In recent years it has taken new initiatives to involve

the Russian scientific community in its R&D activities, following a stage approach: visits to

universities and research institutes in 1998; granting research contracts in 1999; creating a first

research centre at Moscow State University in 2001; and, in subsequent years, creating a

technology hub at Gubkin O&G University and an engineering centre at Akadengorodok. This

very active outsourcing strategy has already given birth to 40 collaborative projects that engage

280 scientists in areas of Russian strength, such as mathematics, numerical modelling techniques/

simulation, geoscience, physics, reservoir engineering, experimentation of alternative techniques

in the oilfield. In addition, Schlumberger contributes to the education of a new generation of

scientists and engineers through various agreements (scholarships, PhD and post-doctoral grants)

with top universities.

Box 2.4. Restructuring research-intensive large state-owned firms:

The case of Svetlana

Svetlana, which was the leading producer of semi-conductors in the Soviet era, exemplifies the

problem. Its Russian customers from the previous era now appear to be buying the bulk of theirelectronic components from abroad. It has an impressive portfolio of technological capabilities

but ones which only lent themselves to exploitation in niche markets, by spinning out medium-

sized firms, or via small spin-off companies. Many other large Russian science-based and

engineering-based companies are probably in a similar situation as their customers replace

Russian made goods with foreign ones. Companies whose customers are mainly in the

government sector would appear to be doing better.

The number of small innovative enterprises is not large, considering

the size of the Russian economy, and that of small R&D-performing SMEs

is of course even much smaller. The framework conditions – tax, capital andfinancial markets, administrative barriers – inhibit the emergence of avibrant SME sector. However a certain evolution in factors that small

enterprises identify as hampering their innovative activity is noticeable

(Table 2.4) and should inspire new policy initiatives.


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Table 2.4. Factors hampering SMEs’ innovative activity

Surveys of 1999 and 2000 Survey of 2003

Lack of financial resources (70% of surveyed) Underdeveloped infrastructure in the area oftechnology commercialisation (46%)

Economic instability in the country (25%) Incomplete and misleading legislation (22%)

Lack of modern equipment (20%) Lack of financial resources (16%)

Source: Foundation for Assistance to Small Innovative Enterprises.

The consequences of the excessive fragmentation of a large part of theinnovation system (public research organisations) and of the atrophy of

some of its other components (university-based research and business R&D)are aggravated by the lack of linkag

OECD-Fostering Public-private Partnership for Innovation in Russia - Copy

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